Ruth Marcus: A cost savings everyone should endorse

Among the topics included in the fiscal cliff talks is a discussion of a way to raise billions in tax revenue — an approach on which House Speaker John Boehner and President Obama agree but that liberals assail as a betrayal of the poor.

Theconsumer price index is used to calculate inflation adjustments in both taxes and government benefits. Astonishingly, switching to a different measure, called chained CPI, is one tax increase that Republicans can swallow.

But the change would also result in smaller benefit checks — hence the liberal uproar over Obama’s supposed treachery in agreeing to it.

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Here’s how the CPI works. When taxes are being calculated, brackets, standard deductions, personal exemptions and the like are ratcheted up with inflation, protecting taxpayers from being forced to pay higher taxes for what is essentially the same amount of income they had previously.

Benefits — everything from Social Security to veterans’ benefits to federal pensions — are similarly adjusted upward to protect beneficiaries’ buying power from being relentlessly eroded.

Such indexing makes eminent sense. The difficulty — and the money-saving opportunity — arises because, in the view of most economists, the current method of calculating changes in the CPI overstates the inflation rate.

It fails to account for what economists call upper-level substitution bias, and what my mother would call plain common sense: If the price rises for a certain commodity in the basket of goods used to measure inflation, consumers will choose a cheaper alternative. In my house, when the price of beef soars, we substitute chicken.

The CPI doesn’t and, as a result, taxpayers are undercharged and beneficiaries are overpaid — a lot. The overestimate is small — less than 0.3 percentage points annually — but, much like compound interest, it adds up over time.

Changing the inflation measure to what is called chained CPI would save $225 billion over the next decade.

Of that, $95 billion would come from increased tax revenue, $80 billion from Social Security (assuming built-in protections for the very old and very poor, about which more later) and the rest from other programs. Because of the compounding effect, the savings in later years would be even larger.

If chained CPI is a more accurate inflation measure, benefit checks will be smaller than they otherwise would have been. But the purchasing power of those benefits will remain the same.

So, you might say, that’s a mighty big if. Indeed, the elderly may face higher costs, especially for health care, than other Americans, and health-care costs are growing more quickly than overall inflation. Some opponents of chained CPI argue instead for switching to what’s called CPI-E, a measure that gives more weight to health and housing costs.

The problem with that is twofold. That measure is imperfect — the “E” stands for experimental. And, as the liberal Center on Budget and Policy Priorities notes, the burden of higher health costs falls unevenly among the elderly. Average costs are skewed upward by a minority who face very high out-of-pocket expenses, a problem better addressed by fixing Medicare to deal with catastrophic costs.

There remain two reasons to worry about a switch to chained CPI — the old-old and the poor-poor.

For the very old, who are more likely to have exhausted other sources of income, the compounding effect of the switch will be significant.

For the very poor elderly and disabled who receive Supplemental Security Income (SSI), the impact could be doubly problematic because CPI is used to compute both initial benefits and cost-of-living increases.

As a result, every commission that has examined the issue and endorsed the change has coupled it with additional benefits for the poorest recipients.

Opponents of the switch — including AARP and, more convincingly, the National Women’s Law Center — insist these protections are inadequate. The administration assures me that, under its approach toward the oldest seniors, the poorest would be shielded and perhaps even better off.

Such concerns are an important reason for care in crafting the details of any change. They are not a reason for refusing to fix an inaccurate inflation measure that overpays beneficiaries and undercharges taxpayers. That is a particularly clumsy, infuriatingly wasteful way of protecting the most vulnerable.

Ruth Marcus is a columnist and editorial writer for The Washington Post. Emailer her at ruthmarcus@washpost.com